Tighter Regulation in China Slows Growth of Core Shadow Banking

Tighter Regulation in China Slows Growth of Core Shadow Banking

Regulatory bodies in China has imposed stringent regulations to slow the growth of the core shadow banking activity, according to a statement released by Moody – the leading rating agency on Monday.

The growth and expansion of the core shadow banking activity in China has reduced significantly below the nominal rate of GDP growth as recorded in the past quarter. The decelerating shadow banking practices can be attributed to the tighter regulations imposed in the country that has encouraged the credit flows to move towards official banking systems, as told by Michael Taylor, the chief credit officer and managing director for Moody in Asia Pacific.

Core shadow banking activities are defined as entrusted loans, undiscounted banker’s acceptance, and trust loans by Moody. The contraction registered in the activities of core shadow banking and gradually increasing shift of credit flows towards formal banking systems will improve the transparency of financial activities and lower risks involved in it. However, this could also mount pressure on certain economic sectors, especially those that depends on shadow banking such as unrated and small property developers, and other small and micro enterprises, said Senior Vice President of Moody, Stephen Schwartz.

Stephen Schwartz also noted that overall credit flows are held up with the increasing support from the easing monetary policies in the China.

According to the survey conducted by Moody to study the trajectory of banking sector in China, non-core components of shadow banking such as e-financing, peer to peer lending, and umbrella trust has been growing at a rapid pace. Hence, gradual shift is occurring in lieu of composition and risk of more widespread shadow banking activities.

Moody also revealed that the share held by assets of trust sector in capital market has risen considerably as against loans offered to more tradition segments in the market.